Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of C.I. Holdings Berhad (KLSE:CIHLDG) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for C.I. Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = RM190m ÷ (RM1.2b - RM665m) (Based on the trailing twelve months to March 2023).
So, C.I. Holdings Berhad has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Food industry average of 8.5%.
View our latest analysis for C.I. Holdings Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of C.I. Holdings Berhad, check out these free graphs here.
What Does the ROCE Trend For C.I. Holdings Berhad Tell Us?
Investors would be pleased with what's happening at C.I. Holdings Berhad. Over the last five years, returns on capital employed have risen substantially to 38%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 99%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a separate but related note, it's important to know that C.I. Holdings Berhad has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what C.I. Holdings Berhad has. Since the stock has returned a staggering 119% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.